Labour Market Flexibility

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Labour Market Flexibility - Activity

Labour market flexibility is seen as an important characteristic of a modern economy. It is one of the issues the Chancellor looks at in informing the five economic tests when consideration is given to whether the UK should join the euro.

Labour market flexibility can be looked at, primarily, as the speed with which the labour market adjusts to shocks, which cause disequilibrium. Such disequilibrium can be caused to a large extent by structural changes in the economy.

A flexible labour market, therefore, is an indicator as to the performance of the economy: how it responds to new ideas; the ease with which resources are transferred between competing uses, and the associated efficiency that results from such resource allocation. (We may not want firms to continue producing goods that people do not want to buy, even if it means keeping people in employment!)

There are a number of factors that will determine the degree to which an economy exhibits the characteristics of labour market flexibility. The Treasury has summarised these in the table below:

Determinants of labour market flexibility

View larger version.

Source: HM Treasury report 'EMU and labour market flexibility', p.17. (Crown copyright material is reproduced with the permission of the Controller of HMSO and the Queen's Printer for Scotland.)

The diagram shows the many influences on the labour market. Each of these may have more or less influence on the degree to which an economy's labour market is able to respond to shocks to the labour market.

Task

You will be divided into three groups. Each group will look at one of the main areas identified in the diagram above.

Wage flexibility
Working time flexibility
Geographical and job mobility

Some of the influences on all three of these areas are given in the diagram. Your group's task is to:

Identify the nature of the influences on each.
Attempt to find evidence of the extent to which the factor has changed in the UK (i.e. is the UK becoming more flexible in these areas?
Identify and explain what measures the government or the EU might take to improve the flexibility in these areas.

Your group will be expected to present an overview of your findings to the other two groups. At the end, the class will engage in a discussion on the extent to which the UK is becoming more flexible and the major obstacles facing the government in fostering a more flexible labour market.

Written Assessment Piece

Evaluate the view that wage rigidity is the primary cause of the stubbornness of structural unemployment to fall in the long term.

Extension Work

Read the paper written by Robert M. Solow entitled 'What is labour-market flexibility? What is it good for?' (http://www.britac.ac.uk/pubs/src/keynes97/text1.html)
Critically assess the views expressed by Solow.

Related Web sites for Research

EMU and labour market flexibility - from HM Treasury - the executive summary gives a useful overview of the main thrust of the report (http://www.hm-treasury.gov.uk/documents/the_euro/assessment/studies/euro_assess03_studworcestershire.cfm)
A panel of regional indicators of labour market flexibility - from Royal Holloway, University of London - some detailed statistics in parts but the overall conclusions are clear enough [PDF, 142 KB] (http://www.ccsr.ac.uk/esds/events/2003-10-21/documents/MonastiriotisPresentation_001.pdf)
Labor market flexibility versus job security - from the New Economy Information Service (http://www.newecon.org/LaborFlexibility_Douglas.html)
Militancy fears unfounded - from the Association of Chartered Certified Accountants (http://www.accaglobal.com/publications/public_eye/42/721414)
Is there an upturn in trade union militancy in public services? - from the BBC (http://www.bbc.co.uk/otr/intext/20020210_film_1.html)
Wage rigidity and unemployment - from Birkbeck College, University of London [PDF, 303 KB] (http://www.ems.bbk.ac.uk/faculty/driffill/Lecturenotes/FE1_Wage_Rigidiity.pdf)
Trends in Geographical Mobility in Britain - from the Strategy Unit, part of the Cabinet Office providing discussion papers for Government [PDF, 45 KB] (http://www.strategy.gov.uk/downloads/su/gmseminar/gm_champion.pdf)
Geographic mobility - from the Strategy Unit [PDF, 230 KB] (http://www.strategy.gov.uk/downloads/su/gmseminar/gm_analytical.pdf)
The effects on families of job relocations - from the Joseph Rowntree Foundation [PDF, 74 KB] (http://www.jrf.org.uk/knowledge/findings/socialpolicy/pdf/533.pdf)